Three Hot Breakouts to Watch

The rate cut cycle you’ve waited for is finally here!

Yes, the Fed is finally cutting this week and the noise couldn’t be louder. Grab your earplugs! Trading could get a little wild as everyone jockeys for position heading into Wednesday afternoon.

We’re even dealing with some interesting new wrinkles as traders debate just how much the Fed might cut tomorrow. Last week, it was looking like 25 bps was a lock. But now, the potential for a 50 bps cut is on the table.

The probability of a 50 bps cut jumped to 49% following Fed whisperer Nick Timiraos’s claim that the FOMC rate decision remains a coin toss. The chance of a double-cut continued to climb Monday morning, registering as high as 59%.

Either way, someone will be caught on the wrong side of this trade. Between the lightning-fast sentiment swings we’ve experienced since August and the intense expectations heading into the rate-cut season, we could see some serious market swings this week.

Now’s the time to mentally prepare for whatever the world throws our way.

Plus, there was yet another Trump assassination attempt over the weekend that’s already getting buried by the hyperactive news cycle. We have just 49 days until the election, but it might feel like a lifetime at this rate.

As always, I like to try to ignore political nonsense – but this is nearly an impossible task heading into November. My only hope is that we get minimal market disturbances and that our pool of potential trades isn’t affected too much as the chaos spreads.

While more of that dreaded uncertainty creep back into the markets this week, it’s not all bad news for investors. In fact, I’m seeing some downright bullish developments percolating under the surface of this market.

A little positive momentum has found its way back into the market. We’re even starting to see some promising trade setups emerging.

But I need to offer a few words of caution before you go out and buy every stock in sight: it’s only September. A few more blips of volatility are certainly possible before we enter what could be a more bullish period for stocks in October and November.

Still, potential market leaders and snapback plays are perking up. And we have to be ready to take advantage of these setups! Despite everything going on in the world right now, it’s beginning to look like melt-up season is just around the corner.

As we’ve discussed many times, we only get “ideal” conditions a couple of times per year, so we have to capitalize when we can. These are the times when breakouts extend (and overextend) and we are spoiled with more viable trades than usual. We’re not there yet. But I can feel it building…

In fact, that pesky rotation trade is starting to extend.

The Big Boys Fall Behind

Last week’s rally was a solid bounce following the early September rout.

Yet while the major averages are quickly approaching their all-time highs, the first-half leaders still have a lot of ground to make up.

Don’t get me wrong – the mega-caps logged a nice snapback week. But the numbers haven’t budged following the four-day swoon that kicked off the month. While the Magnificent Seven names are off their lows, the Roundhill Magnificent Seven ETF (MAGS) still needs to run up another 11% before challenging its August highs. It’s an even steeper hill for the chip stocks, with the VanEck Vectors Semiconductor ETF (SMH) requiring a rally of more than 20% to overtake its own July highs.

For the record, many of these big, popular stocks are nearing some excellent risk-reward levels for folks interested in buying the dip. They might not bounce tomorrow. They might not bounce next week. But if and when the market finds its way out of this seasonal weakness, these names could go on a tear as a fourth-quarter meltup emerges.

Meanwhile, some of our former rotation trades are quietly beginning to firm up. To be clear, these are the same breakouts we were tracking back in the summer that reversed and subsequently failed heading into August. The charts have been messy at best, especially the small-cap Russell 2000.

Yet after 10 volatile weeks, the iShares Russell 2000 ETF (IWM) is finally setting back up for a potential breakout extension.

Back over the summer, it looked as if IWM was going to make another run following its early July thrust to 225 and fresh year-to-date highs. It failed to extend higher from there, opting instead for a nasty whipsaw move that was exacerbated by the Yen panic in early August.

But a move back above 220 could finally trigger the next leg higher for small-caps heading into the fall. Keep an eye on this chart for an explosive move!

Two More Breakouts in the Making…

Small-caps aren’t the only group on the cusp of a big move.

What about precious metals?

Gold continues to quietly post new highs as it gets comfortable in the $2,600 range. Meanwhile, silver jumped nearly 10% last week – its best performance since May. So we shouldn’t be surprised to see the VanEck Gold Miners ETF (GDX) pushing back toward a breakout near $40.

This is the same area where GDX ran into sellers back in 2020 and 2022. If it manages to post a clean breakout here, it’s off to the races.

Then there are the big biotech names.

The iShares Biotechnology ETF (IBB) has clawed back its early September losses and is now knocking on the door to a $150 breakout and its highest levels since late 2021. Again, these biotech names haven’t posted the smoothest trends this summer. But like the miners and small-caps, they’re setting up for potential market-leading moves should these breakouts materialize.

Bottom line: Give the mega-caps and semiconductors some space over the next couple of weeks as precious metals, biotechs, and small-caps approach key areas. These “messier” trade ideas could quickly take on leadership roles and provide excellent trading opportunities heading into October.